Final answer:
Capital budgeting involves determining which productive assets a firm should buy, such as machinery or new facilities, to enhance future profits. Firms can finance these investments through early-stage investors, reinvested profits, loans, or by selling stock, each choice carrying implications for control and repayment.
Step-by-step explanation:
Capital budgeting chiefly involves determining which productive assets a firm should buy. This process includes analyzing long-term investments and deciding which projects will contribute the most to the firm's future profitability and competitiveness. Options such as buying a machine that lasts 10 years, constructing a new plant with a 30-year lifespan, or starting a research and development project are examples of capital investments that are part of capital budgeting.
Firms have several options for raising the necessary financial capital for such investments. They can seek funds from early-stage investors, reinvest their earnings, borrow from banks or through bonds, or raise money by selling stock. Choosing a source of financial capital often goes hand in hand with deciding how to repay investors or lenders, with considerations of maintaining control over the company or committing to regular interest or dividend payments.